What is tokenization?

Every day you take your credit or debit card and swipe it all over town. Do you feel comfortable giving all your information to third parties? What if there was a way to pay without transferring any sensitive data? Well, there it is, and it’s called tokenization.

At its basic level, token development replaces data with a surrogate or temporary value. By replacing data with a surrogate value, a user ensures that hackers or thieves who might get access to the information cannot use it for any real purpose.

Creating a surrogate value is as easy as generating a random string of numbers that can be matched to the original series using a database. For example, with this credit card here, you can create a surrogate value that has no relation to the actual card number and then can match it back to that original card later.

Data Privacy and Security

Before tokenization, you’re transferring valuable data to that merchant when you swipe your credit card at a terminal at your favorite margin. You entrust them with your pan, your primary account number, or just the number that shows up on your card, your full name, address, and even the expiration date on your card.

Therefore, asset tokenization is a more secure and private method, and you don’t need to give the merchant your actual card number or any of your information. All you need to provide them with is this unreal value.

Mobile Payment Solutions

How does this tokenization even work well with the emergence of new mobile payment solutions such as Apple’s Apple pay and androids Android pay?

Token development has always been contested and is a challenging system to implement. Still, these big players in the market have been able to come in, make agreements with the banks and implement tokenization across the market and make it available to everyone.

It all makes sense in theory, I should be able to go to my favorite merchant, and I should be able to pay using tokens. I should have that peace of mind that I’m not handing over my credit card number. How does that work? I can’t just hand them a random number and expect my bank account to be charged.

Drawbacks and Challenges

Business models that rely on tokenization face several challenges inherent in the current token ecosystem.

  1. Technological hurdles
    • There are technical hurdles to the broad adoption of tokenization.
    • The current blockchains would need to scale efficiently to handle the high volume of data and transactions.
    • Furthermore, the existing systems would need to interoperate securely.
  2. Nascent stage
    • The tokenization business ecosystem is still in an early stage of development.
    • The demand for experienced technical and custodial partners is not yet met.
    • The main implementation hurdle for adopting tokenization is the need for more widely accepted and sophisticated regulation.

Need for Tokenization

For real-world assets, disputes over property rights like the responsibility for asset storage maintenance and security are particularly problematic. It could be solved using token development tactics.

  • Centralized Problems
    These legal problems for physical assets require some form of centralization of blockchain technology. They would be contrary to the design of current blockchains, which are typically organized as a distributed network. However, these disadvantages are less severe for digital and blockchain native assets as they can largely be managed on chain.
  • Global challenge:
    We see the advantages of transparency and efficiency of tokenized assets, but we still have high risks and uncertainty due to the need for globally accepted regulatory standards.Many fintech business models are innovative and attractive; however, new financial instruments and business models cannot guarantee survival.

    Therefore, consumers and investors should always be aware of the potentially high risk.

What are tokenized assets?

Tokenized assets are based on blockchain technology and form the foundation of crypto assets like Bitcoin, Tether, or Ethereum.

However, with the blockchain technology used to tokenize assets with tokenization, the economic value and rights for assets can be linked to digital tokens.

  • The tokens can be bought, sold, and traded on different blockchains.
  • In addition, tokenization allows the ownership of assets to be divided into multiple units.
  • A digital token then represents the assets’ subunits.

Ownership rights to basically anything can be tokenized and stored on the blockchain, from music, real estate, and gold to various financial securities.

Categorization of Assets

Tokenization can be distinguished into two groups of assets:

  1. Real-World Assets
    • Real-world assets like property continue to exist off-chain or outside the blockchain.
    • A custodian must ensure the tokens are backed by their real-world counterparts.
  2. Native Assets
    • Native assets like cryptocurrencies exist on-chain or on the blockchain.
    • Native assets represent value by their proper design and existence on the blockchain.
    • Therefore, the management of native assets is transparently documented in a distributed blockchain network without needing external custodial.

Benefits of asset tokenization

The tokenization of assets could provide several benefits for companies, investors, and financial institutions. While it is comparatively easy for investors in developed markets to invest in equities or real estate, this is different in developing countries.

  1. Automation
    • A highly automated token issuance and management process combined with a high transaction speed can reduce investment costs.
    • Thus, token development can improve accessibility to investment opportunities for small investors in developing countries.
    • Tokenization could also give investors in developed countries better access to the financial market by eliminating intermediaries like stock exchanges.
    • The tokenization of equities would allow retail investors to buy newly issued shares in the primary market and directly invest in publicly traded shares.
  2. Investment
    Furthermore, tokenization could be used in highly illiquid markets requiring significantly little diversified investments into a single asset like private equity.

Wrap Up

Asset Tokenization allows fractional ownership for illiquid assets, helping retail investors access new asset classes.

Token development: Benefits in financial markets.

  • In general, tokenized assets’ transaction history is transparent and securely recorded on the blockchain.
  • The security of a distributed blockchain network does not depend on a single point of failure.
  • The immutability of the record of tokenized assets and the use of cryptography improves the security and resilience of the infrastructure.

Antier, the pioneer in developing the Enterprise blockchain, provides tangible solutions to asset tokenization; thus, market participants and regulators could automatically audit the assets and track their past ownership reducing the market complexity.